-Refer to the Above Diagram and Assume That Prices and Wages

question 15

Multiple Choice

-Refer to the above diagram and assume that prices and wages are flexible both upward and downward in the economy. In the long run AD-AS model:

• A) demand-pull inflation would involve a shift of curve D to the right.
• B) cost-push inflation would involve a shift of curve B downward.
• C) recession would involve a leftward shift of curve A.
• D) frictional unemployment would be zero in the long run.

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Definitions:

Aggregate Supply

The total output of goods and services that producers in an economy are willing and able to supply at a given overall price level in a specified time period.

Price Levels

The midpoint of prices for every type of good and service produced economically.

Cost-Pull Inflation

Inflation caused by an increase in prices of inputs like labour, raw material, etc., leading to a decrease in the supply of these goods.

Demand-Pull Inflation

A sustained rise in the price level caused by a rightward shift of the aggregate demand curve.